On September 16, 20X8, Toys “R” Us, the world’s largest toy seller,

Announced strategic initiatives tore structure its business. The total cost of implement these initiatives yielded a charge of $508 million, which exceeded operating earnings from the prior year. The $508 million charge consisted of costs to close and/or downsize stores, distribution centers, and administrative functions to streamline store formats, inventories and supply chains; and for changes in accounting estimates and provisions for legal settlements. These initiatives included the closing of 50 toy stores in the international division, predominantly in continental Europe, and 9 in the U.S. that did not meet the company’s return on investment goals. It also closed 31 Kids “R” Us stores and converted 28 nearby U.S. toy stores into combination stores. Combination stores sell toys and apparel. These initiatives were expected to save more than $75 million in 20X9 and even more in subsequent years. At the time of the restructuring announcement, the company had 116,000 employees and 1,145 stores worldwide. Of the

1,145 stores, 697 are in the U.S. The company also ran 214 Kids “R” Us stores, 101 Babies “R” Us stores, and 2 KidsWorld stores. It hoped to reverse a trend of losing sales to Wal-Mart and other discount retailers. Toys “R” Us had an 18.4% U.S. toy market share in 20X7, down from 18.9% in 20X6. Wal Mart’s share and Target’s share rose from 15.3% to 16.4%, and 6.4% to 7.1%, respectively, during that time. Toys “R” Us selected financial reports follow:

Required:

Refer to the Toys “R” Us financial information to answer the following questions.

a. What is the total amount that Toys “R” Us spent for its restructuring plan? Analyze the breakdown of charges and identify where the charge is reported in the income statement.

b. Recast the income statement without the restructuring charge and analyze operating performance for 20X9 by comparing with 20X8 performance.

c. Identify the major elements of its restructuring strategy and their economic effects. What will be the effect on future income and how are the savings expected to arise?

d. Discuss how the restructuring liability could be used by Toys “R” Us as a vehicle for earnings management. In your opinion is Toys “R” Us managing earnings through this charge?

e. Describe how an analyst would recast the balance sheet and income statement of Toys “R” Us to reflect the restructuring costs as an investment to create future cost savings.

f. How can the relative success of these restructuring activities be measured?